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Dollar's Reaction to Swine Flu Temporary?

Last updated 4/27/2009 10:44 AM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

The U.S. dollar has strengthened against all higher yielding currencies on the fear of a global health pandemic.  A respiratory disease known as the swine flu is spreading across the globe.  Although it is a serious threat that has sent the Mexican peso (the outbreak began in  Mexico) tumbling, the impact on the major currencies should be limited.  In other words, the risk aversion relating to the Swine Flu that we are seeing today should be temporary.

This is not the first time in the past decade that we have had a major health outbreak.  In early 2003, the SARS epidemic swept across Asia and rapidly infected people in 37 countries around the globe. Although it dealt a big blow to the trade and tourism industry in Asia, there was a minimal impact on the G10 currencies.  Even though there was an outbreak in Toronto, the Canadian dollar managed to rally in the first four months of 2003.  

In late 2005 into 2006, the Avian Flu (Bird Flu) hit southeast Asia and parts of Eastern Europe. Once again, the impact on the G10 currencies was limited.  

SARS, the Avian Flu and even the Mad Cow Disease has caused a wave of fear across the globe that have now come and gone. Some experts are comparing the Swine Flu to the 1918, 1957 and 1968 flu pandemics that have killed millions of people around the world.  The last major break was more than 4 decades ago and there is no question that medical technology has advanced significantly since then.

In the past decade, the Bush Administration also has taken a lot of initiatives to prepare the U.S. for a global influenza pandemic. In 2005, President Bush unveiled the National Strategy To Safeguard Against The Danger of Pandemic Influenza that increased spending on vaccine research and production as well as outbreak detection.  This has put the U.S. government in a good position to respond to any major outbreaks of the Swine Flu and in its current stage, the flu is easily treatable with the two major flu drugs that are already in existance. Having declared a Public Health Emergency as precautionary measure, the Obama Administration will be nipping the flu at its early stages of exposure into the U.S. population.  The outbreak is also happening at the end of the flu season and not at the beginning.  So far, the outbreaks in the U.S. and Canada have been described as mild.  The SARS outbreak, which received a tremendous amount of media coverage and stifled trade temporarily to Asia led to less than 800 fatalities across the globe.  

Risk of Global Pandemic is Low

It is important to stay sanitary but the risk of a global pandemic is low. Therefore the impact on the currency market as a whole should be limited.  The U.S. dollar could continue to rally on risk aversion related to the global recession ahead of the FOMC meeting later this week but it will be because of the U.S. economic outlook and not the flu.  We believe that like SARS, the Avian Flu and Mad Cow Disease, these fears will pass. For the Mexican Peso and Mexico's economy on the other hand, the impact on trade and tourism will be significant and therefore we expect more weakness in the Peso.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.